Want venture capital? Social media use can be key

Jonathan Murray is managing director of Draper Triangle Ventures, making early-stage investments in companies in Michigan and Northern Ohio.

An early-stage, pre-revenue Midwest company I know recently opened the mail and was surprised to find a term sheet offering an investment on favorable terms. The company was surprised because it wasn't raising money, didn't know the investment firm and hadn't previously engaged with them. What happened?As the company unraveled the unsolicited offer, it discovered that the New York-based investment company had an investment thesis and was monitoring dozens of early-stage companies in this particular market. It had devised a series of triggers, such as gaining particular brand name customers, which signaled that a company had reached the validation stage. When one of the triggers was tripped, they would make a preemptive investment offer to get out ahead of competitors. Not only were they preemptive, but they also forestalled an auction with a valuation and terms that were quite acceptable to the company.This was a revelation that has caused me to think about how this lesson can be applied to early-stage companies seeking to raise money, particularly in regions such as the Midwest where early-stage venture capital historically has been in short supply.Early-stage venture capital is a local business. Companies are introduced to venture capitalists (VCs) through trusted personal relationships. Investments are made based on interactions with the entrepreneur or team. VCs want to know the people in whom they invest, and to be close by portfolio companies to keep an eye on them and to help as needed during inevitable rough spots. Entrepreneurs want VCs nearby to help with strategy, resources, networking and capital-raising. These are reasons that startups cluster in places like Silicon Valley, with its proximity to the many venture firms on Sand Hill Road and the many regional networks. Most Midwest states are trying to build their own entrepreneurial ecosystems, and capital availability is a critical component. A generation ago, entrepreneurs had to leave the Midwest and migrate to Silicon Valley to build their companies. With the efforts of states to retain them, this migration has been halted and places including Ann Arbor, Indianapolis and Cleveland are now mini-hotbeds of entrepreneurial activity. Seed capital from accelerators, angels and angel networks is growing and startups readily can get initial funding.Unfortunately for entrepreneurs, there is a chasm after that. First-round institutional early-stage venture capital — Series A, in VC parlance — is in short supply in the Midwest. This is because there are few VCs to provide such capital, which is a function of history, market cycles, performance and capital flows into and out of various asset classes. There are many more Midwest companies getting seed funding and initial market traction that are going to need Series A financings than there are VCs to provide that funding.What is a company to do to cross this chasm?Capital concentrates in money centers such as New York, Chicago, San Francisco and London. It also attracts very smart people who are looking perpetually for an edge in investing: overlooked opportunities that they can arbitrage for gains beyond the ordinary. These people may not think of the Midwest as a place to invest or as a hotbed of entrepreneurial activity. They may have sparse networks in the region, and they certainly aren't based locally or spending a lot of time trolling for deals. Companies have to go to them to get their attention.Until a scant few years ago, getting on the radar of money center managers meant doing a lot of cold-calling to get appointments, traveling to them and making dozens of fruitless presentations for every one that resulted in interest. This is an inefficient, time-consuming, low-yield direct-selling activity that many companies lacked the patience, resources or persistence to bring to successful resolution. Now, with the ubiquity of the Internet and the expansion of social media, companies can bypass this inefficiency and get the attention of money center managers with effective social media strategies. That's what happened with the company that began this thought process, though they didn't know it. Company officials were regularly posting results of their success to media outlets, blogs and social media platforms such as LinkedIn, Facebook and Twitter. They rose to the top of their peer group in positive social media rankings, and this triggered the term sheet.The world has changed. Capital is fungible and flows to opportunity. It no longer necessarily has to be provided by local people known to entrepreneurs. Companies seeking to raise capital need to actively cultivate social rankings to get the attention of distant investors. Not phony publicity, of the type that drove the dot-com bust of 2001, but genuine accomplishments, along with educational content that informs people about the company's value to customers.Where does this leave regional VCs like me? Money center managers often want a locally based institutional investor to give them comfort that somebody nearby will be engaged with the company daily, especially earlier-stage companies. Entrepreneurs can forge productive capital structures that include local VCs and coastal capital. The more actively involved regional VCs are in that process, the likelier that companies will be able to build balanced, successful capital strategies.